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MOODY'S ASSIGNS A2 UNDERLYING TO CITY OF BUFFALO'S (NY) $27.3M G.O. IMPROVEMENT BONDS SERIES 2011C AND D AND AN A1 ENHANCED RATING TO $4.9M SCHOOL SERIAL BONDS 2011D; OUTLOOK IS POSITIVE

20 Jun 2011

A2 RATING AND POSITIVE OUTLOOK AFFECT $265.6M IN LONG TERM PARITY DEBT, INCLUDING THE CURRENT OFFERING

Municipality
NY

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Improvement Serial Bonds - 2011C

NA

A2

  Sale Amount

$22,400,000

  Expected Sale Date

06/15/11

  Rating Description

General Obligation

 

School Serial Bonds - 2011D

A2

A1

  Sale Amount

$4,900,000

  Expected Sale Date

06/15/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Jun 20, 2011 -- Moody's Investors Service has assigned an A2 rating with a positive outlook to the City of Buffalo's (NY) $22.4 million General Improvement Serial Bonds - 2011C and $4.9 million School Serial Bonds - 2011D. Concurrently, Moody's has affirmed the city's general obligation rating of A2 and positive outlook, affecting $213 million of previously issued parity debt secured by the city's unlimited property tax pledge.

SUMMARY RATINGS RATIONALE

The rating reflects improvement of the city's financial operations and liquidity following augmentation of reserves in each of the last eight years and a trend of structurally balanced operations that is expected to challenged in fiscal 2011 (year ends June 30). The rating also factors: (1) challenges posed by the city's poor demographic profile, and high debt burden that is expected to gradually moderate, (2) the oversight of city operations by the Buffalo Fiscal Stability Authority (BFSA, sales tax and state aid secured bonds rated Aa1), which has approved the city's four-year financial plan, (3) the city's improved revenue raising flexibility given modest growth in assessed valuation and improved taxing margin and (4) additional bondholder security provided by the city's legally required and trustee-held bi-annual set-aside of debt service payments from first property taxes collected. The positive outlook reflects Moody's belief that the city's liquidity and reserve position have improved substantially, as evidenced by elimination of the need for seasonal cash flow borrowing in the last three fiscal years. The currently healthy cash position is expected to provide satisfactory cushion against risks related to the current economic recession, potential state budget cuts or delay in payments and liabilities related to open labor contracts and ongoing litigation. The positive outlook factors our expectation that the city will maintain its currently strong financial position in the face of these challenges, given demonstrated conservative fiscal management. Proceeds of the Series 2011C Bonds will finance various infrastructure and capital projects throughout the city. Proceeds of the Series 2011D Bonds will finance improvements and upgrades to a number of schools across the city.

Moody's has also assigned an enhanced rating of A1 to the Series 2011D bonds, based upon the additional security provisions offered by New York State's school debt intercept program. New York's school debt enhancement program, contained in Section 99-B of the State Finance law, authorizes the state to withhold future allotments of state aid in order to make bond payments in the event of default by the school district. While the program does not ensure avoidance of a pending default or guarantee immediate repayment, Moody's believes it does enhance the potential for recovery upon default and that the cure period is likely to be short.

STRENGTHS:

-State oversight board provides supervision over city's finances.

-Conservative budgeting has increased reserves considerably over the past eight years.

-Direct pay of first-in property tax money to the trustee for payment of debt service.

CHALLENGES:

-Uncertainty around outstanding union contracts and pending litigation

-State aid cuts could put significant pressure on city's finances.

DETAILED CREDIT DISCUSSION

HEALTHY RESERVES AND CONSERVATIVE MANAGEMENT PROVIDE BUFFER AGAINST NEAR TERM RISKS

Moody's believes the city's financial flexibility has improved, given augmentation of reserves in each of the past eight fiscal years due to a combination of one-time revenue sources and management's conservative budgeting of both revenues and expenditures and adherence to its recovery plan. Accordingly, General Fund balance increased to a strong $142.7 million (31.4% of General Fund revenues) as of fiscal 2010 from $46.9 million (12.3% of revenues) in 2003. During this time period, the city's net cash position (combined General Fund and City School District) has improved to a solid 25.3% of combined revenue from a narrow 5.5% in 2003. Notably, fiscal 2008 was the first year in which the city funded its Rainy Day Fund, set by city charter to equal 30 days' operating expenditures. Taken together, this designation ($34.3 million), along with undesignated General Fund balance ($49.9 million) comprised 18.3% of General Fund revenues at the end of fiscal 2010. While Moody's believes the city remains exposed to risks associated with potential state aid cuts, open labor contracts, ongoing litigation and stagnant growth related to the economic recession, we believe that the city's current financial position and conservative fiscal management provide satisfactory cushion against these risks. For example, city operations have benefited from healthy increases in state Aid and Incentives to Municipalities (AIM), which grew at an average rate of 10.7% between fiscal 2006 and fiscal 2009. Favorably, the city does not budget AIM increases in the year they are appropriated by the state, mitigating the city's vulnerability to future state budget cuts. Further, Moody's believes that management has planned appropriately for future settlement of open public safety union contracts, and the settlement of continuing litigation against the city and the City School District (CSD) related to a wage freeze imposed April 2004 and lifted as of July 1, 2007. We also note that the city's revenue raising flexibility has improved as taxing margin increased to $35.7 million in fiscal 2011 (20% of the city's constitutional taxing limit as compared with a low of 5.7% in fiscal 2006). Nevertheless, taxing margin remains narrow, comprising 2.8% of fiscal 2011 budgeted operating expenditures (General Fund and Board of Education), or 7.7% of budgeted General Fund expenditures. On a positive note the city finished fiscal 2010 without the need for cash flow borrowing, the third consecutive year. Additionally, financial flexibility to pay debt service is available for the city with approximately $5.9 million available in the city's debt service fund.

FAVORABLE FINANCIAL OPERATIONS EXPECTED TO CONTINUE; CITY RECOREDS EIGHTH OPERATING SURPLUS IN 2010 ; FISCAL 2011 EXPECTED TO END WITH A SLIGHT FUND BALANCE DECLINE

The city generated its eighth operating surplus at fiscal 2010 year-end, increasing General Fund balance to $142.7 million, or a healthy 31.4% of General Fund revenues. Positive operations were primarily due to additional unbudgeted state and federal aid, as well as charges for services exceeding budget projections; the city also experienced savings in utility, and administrative expenditures. The fiscal 2011 General Fund budget represents 2.7% growth over the prior year (budget to budget), and is balanced with increased property tax revenue and a $12.1 million fund balance appropriation, a change in practice from prior years as fund balance was not included in the fiscal 2009 and fiscal 2010 budgets. As of third quarter the Administration projected a budgetary surplus of $3 million, however, depending on various factors, including declines in state aid and increased pension payments, the city could finish the year with a fund balance decline. The city's primary operating revenue sources consist of state aid (43% of fiscal 2010 revenues) followed by property taxes (31% of fiscal 2010 revenues). Management continues its conservative practice of budgeting zero growth in state aid. Should annual growth in state revenues slow or reverse due to pressure on the state budget, margins associated with this significant revenue source (43% of fiscal 2010 General Fund budgeted revenues) may decline.

FOUR-YEAR PLAN APPROVED BY BUFFALO FISCAL STABILITY AUTHORITY

The Buffalo Fiscal Stability Authority (BFSA) was created by act of the State Legislature on July 3, 2003 to control and supervise the financial affairs of the City of Buffalo. The BFSA has been charged with the creation and implementation of a four-year recovery plan, annual budget review and revenue forecasting. The BFSA is also required to sign-off on labor contracts currently pending and as has the demonstrated authority to negate provisions of contracts in force. State legislation facilitates borrowing by BFSA and authorized intercept of municipal state aid and sales tax receipts to secure such borrowing. Moody's believes the BFSA has been particularly important as the city has minimal revenue raising flexibility given its declining and relatively poor population and expenditure reductions already realized. In the medium term, the City of Buffalo administration, working in tandem with the BFSA, may favorably impact city financial operations if it is successful in re-engineering city operations, resolving contracts and securing revenues that will promote long-term structural balance.

The city's four year plan (fiscal years 2012 through 2015) was approved by the BFSA on June 15, 2011. Moody's considers the development of a multi-year plan and the oversight provided by BFSA to be key credit strengths for the city. The current plan assumes annual budget growth of 0.1% to 1.6%, primarily driven by fringe benefit costs. The plan maintains state aid at the current level and anticipates 3% annual growth in the city's share of Erie County (G.O. rated A2/stable) sales tax, which may be vulnerable given the ongoing economic recession. The plan is balanced in the out-years with the use of fund balance, and assumes drawing down $2.3 million of state aid currently held by the BFSA. Future rating action will consider the city's ability to implement this plan and make adjustments as necessary to maintain sufficient financial flexibility.

DESPITE CHALLENGES CITY SCHOOL DISTRICT MAINTAINS SOLID FINANCIAL POSITION; RESERVE SET ASIDE TO OFFSET LITIGATION RISK

Despite significant challenges that have necessitated staff reductions and building closures, the Buffalo City School District, a component of the City of Buffalo, has maintained an adequate financial position. Fiscal 2010 ended with a substantial $42.3 million surplus driven by expenditure savings generated from vacant positions, and health insurance and utility costs coming in under budget. Fund balance increased to $212.2 million, equivalent to a solid 29.4% of revenues, of which $36.3 million (5% of revenues) was undesignated. Fund balance includes substantial designations against outstanding risks, including $14.4 million for prior year claims and $72.4 million for the subsequent year's budget, of which $37 million is to fund the settlement of ongoing litigation related to teacher salary step increases accrued while the wage freeze was in place. The 2011 budget appropriates $72.4 million from fund balance, including $37 million to fund the district's retroactive liability associated with anticipated settlement of wage freeze-related litigation, and includes an $18.5 million appropriation for fiscal 2010 current costs associated with this settlement. The budget also funds a court-ordered return to a multi-carrier insurance plan; favorably, the district was able to limit the incremental cost of this shift to $4 million annually. Management currently expects to finish the fiscal year with a $10 million surplus on a budgetary basis, on a GAAP basis it is unclear at this point if the district will end the year with a surplus. Additional financial flexibility is available for the payment of debt service with approximately $133 million, enough to cover over a year and half of debt service payments.

The BFSA-approved four-year plan for the Board of Education projects growing out-year gaps of $16 million, $52.8 million, $61.8 million and $76.8 million in fiscal years 2012 through 2015, after the cumulative use of $42.5 million from fund balance over the four year period. The plan holds state aid flat at the fiscal 2010 level in fiscal years 2012 and 2013 in accordance with guidance from the state, placing significant pressure on projected operations given a high reliance on state aid (80% of district revenues) and driving the projected use of reserves over the plan period. Projected out-year gaps incorporate the $18.5 million annual cost associated with resolution of ongoing salary step litigation.

TAX BASE CHALLENGED BY LOW WEALTH LEVELS; MODEST GROWTH IN ASSESSMENTS FOLLOWING YEARS OF DECLINE

Moody's expects the city's $6.9 billion tax base will remain challenged by continued population declines, high unemployment levels and wealth levels well below state medians. According to updated 2010 U.S. Census figures the city's population was 261,310, down 10.7% from 2000, a continuation of the trend that began in 1950 when the city's population peaked at 580,132. Despite the population losses, unemployment has consistently remained above the state and national averages, and was 9.2% in April 2011 as compared to 7.7% and 8.7% for the state and nation, respectively. The city remains exposed to potential future automotive industry contraction given the presence of a General Motor engine plant (1,100 employees) within Erie County and GM supplier Delphi (2,100 employees) located in nearby Niagara County (G.O. rated Aa3). According to Moody's Economy.com (September 2010) while production has increased at factories, employment will remain relatively flat. GM and other auto companies have been hiring over the past few months, but most of the hiring has been recalls. Positively, GM is investing $800 million in its Tonawanda engine to build cleaner-burning engines and work on both the Ecotec engine and new V-8 will begin in 2012.

Notably, following seven years of annual decline, the city's taxable valuation has grown in each year beginning in 2003; growth has averaged 2.8% annually over the past five years reflecting ongoing development, including $800 million invested downtown over the past two years. Recent and current development projects include a new Embassy Suites hotel, office buildings, a federal courthouse, and renovations to the Lafayette Hotel. Officials report that the temporary Seneca Casino has expanded operations and further construction consisting of a hotel and condominiums has been restarted after a suspension following the economic slowdown. City wealth indices continue to fall well below average as evident in median family income at 60% of the state average and a 26.6% poverty rate, which is almost double the state level.

DEBT BURDEN EXPECTED TO REMAIN WELL ABOVE AVERAGE

Moody's expects the city's overall debt burden (7.1% of the city's fiscal 2011 full valuation) will remain high, but will gradually moderate given modest tax base growth, rapid amortization of debt and management's policy of retiring more debt than is issued annually. While state school building aid reduces the city's debt burden, it remains well above average at 6.5% of full valuation. Pursuant to New York State Statute, the city has established a debt service reserve fund held by the trustee. The trustee intercepts all first in property tax revenue for payment of debt service during each collection period (July 1 and December 1). After the trustee has sufficient cash to cover debt service for the period following the collections the remainder of the property tax money is then remitted back to the City. This provides additional security for the payment of the city's debt service. The city school district maintains sizable capital needs, although, these are expected to be financed by the Erie County IDA and should not alter the debt profile. Approximately $1.4 billion has been issued under this program since 2003 ($1.1 billion currently outstanding). These separately secured, yet parity issuances are each rated Aa3/stable outlook, reflecting the city school district's obligation to make lease payments to the Erie County Industrial Development Agency to pay debt service; a pre-default state aid intercept in the event of non-appropriation; a flow of funds that provides full segregation of debt service 30 days before annual principal and interest payment; and a debt service reserve fund that is funded at 50% of MADS. This debt is excluded from the city's debt statement based upon security mechanics and sources of payment from non-city funds, primarily state school building aid. All of the city's outstanding debt is fixed rate, and the city is not party to any derivative agreements.

Outlook

Moody's positive outlook reflects our belief that the city's liquidity and reserve position have improved substantially, as evidenced by elimination of the need for seasonal cash flow borrowing in the last three fiscal years. The currently healthy cash position is expected to provide satisfactory cushion against risks related to the current economic recession, potential state budget cuts and disbursement delays as well as liabilities related to open labor contracts and ongoing litigation. The outlook factors our expectation that management will maintain its currently strong financial position in the face of these challenges, given its demonstrated conservative fiscal management.

What could change the rating (up)

- Demonstrated ability to maintain satisfactory financial flexibility and liquidity relative to peers, through the current recessionary cycle

- Continued trend of structurally balanced operations despite increasing contractual expenditure pressures and potential state budget cuts

- Significant increases in socio-economic profile

What could change the rating (down) - removal of positive outlook

- Depletion of reserves or liquidity position in the face of near-term economic and budgetary challenges

- Structurally imbalanced operating results

- Reversal of trend of increasing taxing capacity

KEY FACTS

2010 population: 261,310 (10.7% decline from 2000)

2011 full value: $6.9 billion

Full value per capita: $25,588

Direct debt burden: 7%

Overall debt burden: 8.1% (6.5% adjusted for state school building aid)

Principal payout (10 years): 84.7%

FY10 General Fund balance: $142.7 million (31.4% of General Fund revenues)

FY10 Combined Operating Fund balance (General Fund, CSD): $354.9 million (30.4% of combined revenues)

Per capita income as % of state: 64.1%

Median family income as % of state: 59.2% of state average

Post-sale rated parity outstanding debt: $265.6 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Robert Weber
Analyst
Public Finance Group
Moody's Investors Service

Jessica A. Lamendola
Backup Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
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New York, NY 10007
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MOODY'S ASSIGNS A2 UNDERLYING TO CITY OF BUFFALO'S (NY) $27.3M G.O. IMPROVEMENT BONDS SERIES 2011C AND D AND AN A1 ENHANCED RATING TO $4.9M SCHOOL SERIAL BONDS 2011D; OUTLOOK IS POSITIVE
No Related Data.
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